ELECTION: Brazil’s presidential and congressional election campaign started last week. Leftist ex-President Lula is favorite to regain power in an October 30th runoff, but the race is tightening (see chart). The sluggish economy will benefit from less consumer and investment election uncertainty, as it faces easing commodity prices and higher US interest rates. But whoever wins needs to strengthen the fiscal position and push economic reforms, after a ‘lost decade’ of stagnant GDP. The combination of greater political visibility, high and peaking interest rates, and the world’s cheapest equity valuations, makes this a market that should keep standing out.
POLLS: 156 million Brazilians go to polls October 2nd, with a run off October 30th if no one wins 50% of the votes. The election is polarized between right-wing incumbent Bolsonaro and leftist ex-president (2003-2011) Lula. Polls are narrowing as Bolsonaro boosts welfare programmes and limits fuel rises, raising some risks of a contested election. But it remains Lula’s to lose, and he has bolstered his outreach to business and markets with his chosen VP candidate Alckmin.
IMPACT: The BRL is the best performing major currency this year, up 9% against the dollar, and remains undervalued. It’s one of few countries with positive real interest rates. Brazil (EWZ) is also one of few global stock markets up this year. It remains the world’s cheapest with a forward P/E under 9x, and off of low earnings expectations. Local stock heavyweights are Petrobras (PBR.A), Vale (VALE), and bank Itau (ITUB). It’s the world’s 12th largest economy, dominates LatAm, and has global stock impacts from US’s Mosaic (MOS) to Spain’s Santander (SAN). See @LatamEconomy. But it’s only 5% of the emerging market index (EEM), where Asia dominates.
All data, figures & charts are valid as of 24/08/2022